On 25 June 2009, the European Commission formally requested the UK to amend its existing legislation relating to the charging of VAT on the supply of goods and services related to aircraft, which the Commission believes is inconsistent with the requirements of the EC VAT Directive.
The basic principle under the EC VAT Directive is that VAT is chargeable on the supply of aircraft and related goods and services unless the aircraft is “used by airlines operating for reward chiefly on international routes”. In other words, the purchase or rental of an aircraft, as well as the supply of goods and services in connection with an aircraft, will be exempted from VAT where the aircraft is operated by an airline chiefly on international routes. This exemption has been extended recently by the European Court of Justice to include aircraft operated by an airline on domestic services, provided the airline operates mainly on international routes.
Historically, the UK has adopted a different criteria based on weight and design in applying the zero-rating regime (an "exemption" in European terms) to aircraft supplies. The effect of the UK's regime is that an aircraft weighing more than 8000kgs and not designed or adapted for private pleasure flying is not liable to VAT, even if such aircraft is not used by an airline “operating chiefly on international routes”. Additionally, aircraft weighing less than 8000 kg are not exempted even where used by an airline which is “operating chiefly on international routes”.
The UK has been given until 25 August 2009 in which to bring its legislation into line with the EC VAT Directive. Any failure to do so could result in legal action against the UK in the European Court of Justice.
The effect of the changes, if and when introduced, will be that the costs of purchasing, leasing and operating aircraft in the UK will be subject to 15% VAT (expected to increase to 17.5% next year) unless the aircraft is operated by an airline for reward chiefly on international routes” - which is unlikely to be the case for most private or corporate aircraft. This will be the case irrespective of the weight of the aircraft. Owners/operators of aircraft will only be able to fully reclaim this extra cost if the aircraft is used wholly for making VATable supplies in the course of business.